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CEI Comments On Telecommunications Market Access In The Free Trade Area Of The Americas Negotiations

Before the United States Trade Representative Interagency Trade Policy Staff Committee

Comments of Competitive Enterprise Institute Concerning

These comments pertain to non-tariff barriers to trade in the telecommunications sector, in particular, the nature of other countries’ regulatory regimes governing the opening of incumbent phone companies’ networks to new competitors. As we explain below, USTR should avoid “exporting” the United State’s telecommunications regulatory regime, with its controversial apparatus of price regulation and unbundling requirements, to other countries. While the United States has been a leader in bringing competition to the telecom sector, we do not have a monopoly on economic insight, nor do we fully understand the conditions that pertain in other countries.

Part I: The Current Crisis in Telecommunications Is Largely Due to U.S. Regulatory Policy, Particularly Policy Regarding UNE’s and TELRIC

It is no secret that the telecommunications sector is in financial crisis. The crisis began with some of the new entrants, known as “competitive local exchange carriers,” or “CLECs.” It has hit the long distance sector hard, Worldcom being the most obvious example, but with Sprint and AT&T’s health also wavering. And it has also hit incumbent local exchange carriers.

Some have blamed deregulation. But this does not hold water. What, exactly, has been significantly deregulated in the telecommunications service sector? Not universal service, certainly. Nor long distance, as the former Bell companies have been allowed to enter that sector only after a laborious regulatory process and only on a limited scale. Retail pricing for local services has not been deregulated. Substantial regulations have been added, governing universal service, and, of course, local competition, with a new apparatus of interconnection and unbundling price and access regulation. The fact is, telecommunications remains the most heavily regulated sector of the United States economy—with the possible exception of energy, fraught with its own crisis.

Other observers have blamed “hype” for the telecom crisis, in particular, a giddy optimism about the growth of data traffic. This is closer to the mark, but leaves many unanswered questions. During the late 1990’s, regulators and investors were told that data traffic was growing at a rate of four hundred percent annually, when the real figure was closer to one hundred percent. But why were these false representations so readily believed across an entire sector? Why has “hype” not similarly afflicted the grocery business, or package delivery services?

The only remaining plausible answer is this: U.S. regulatory policy encouraged broad, unsustainable investment in telecommunications companies that added no real economic value to the networks. Indeed, the only detailed analyses of the crisis offered by credible industry observers, including Scott Cleland of The Precursor Group,[1] John Wohlsetter of the Discovery Institute,[2] Peter Huber of the Manhattan Institute,[3] and Commissioner Kathleen Abernathy of the FCC,[4] point to regulatory policy as a key root cause of what ails telecom.

Which regulatory policy, in particular? The forced unbundling of network elements (affectionately known as UNE’s) at steeply discounted prices, that is, total elemental long-run incremental cost, or TELRIC. This regulatory regime brought about managed competition through myriad weak resellers, but eroded incentives to build new facilities and upgrade old ones. The strong potential players in the market, particularly cable companies, were undermined by countless weak ones. The incumbent local phone companies, losing market share to cellular, email, still largely barred from long distance markets, were denied meaningful benefits from upgrading their old networks or trying to make a wholesale business of them. Again and again, regulators sent a message to investors through their words and actions that they would protect weak competitors from economic reality. Ultimately, the economy as a whole paid the price.

Part II. Three Policy Consequences for USTR

A. The USTR should not pressure other countries to adopt failed UNE/TELRIC policies or other detailed rules. In the past, the USTR has pressured other countries, particularly Japan, to adopt interconnection and unbundling pricing and policies similar to our own. The recent crisis should bring that practice to a screeching halt. The rest of the world is right to follow our lead in trying to open telecommunications markets to competition. But the FCC is not infallible as to the precise methodology to be used. The USTR has even less expertise than the FCC. In the ongoing negotiations with Chile, Singapore, and many other countries, U.S. trade representatives should advocate forced unbundling only with a concrete sunset date (within three to five years); under no circumstances should they recommend any particular plan for discounting the prices of networks elements.

Other countries can see the benefits to their citizens and economies from liberalizing the telecommunications sector; we all look to the remarkable growth of the still largely unregulated Internet as a promise of what a less regulated future can hold. The United States should feel confident that the promise of liberalization will bring other countries to reform their telecommunications sectors in good faith, just as it has brought them to the bargaining table in the first place. We should feel no need to micromanage the process—and beware of the arrogance that comes from being often invited to “help.” The real miracle worker in communications and computing has been the market process, not any conscious design of any regulator.

B. The USTR should respect the differences between different national telecommunications markets. Even if the unbundling and price regulation policies adopted by the FCC were ideal for United States markets, different conditions pertain in other countries. The United States has a tremendous amount of legacy copper loop and fiber cable in the ground, and the adoption of cellular and other wireless technologies has sometimes been sluggish (a situation that is changing). Therefore it us understandable, if not ultimately wise, that regulators in the United States focused on unbundling wireline services as a primary objective. But the conditions that pertain in other countries are very different.

Many countries are not well-wired, either because they are too poor (as in Eastern Europe), or because of rough terrain (as in Norway or Finland), or both (as in India and large parts of Central and South America and Southeast Asia). In these countries, it makes little sense to emphasize unbundling legacy wires as a primary objective. New entry will come mainly from wireless, ground-based and satellite, both for local and for long distance service. Ultimately, this may prove this most hopeful direction for the United States, as well, at least for certain types of low-bandwidth messaging. We may learn a great deal from regulatory experiments with wireless in other countries.

C. The USTR should not bind the United States by treaty to one telecommunications regulatory regime. The FCC is presently engaged in a great deal of soul-searching (if an agency can be said to have a soul) about the future of telecommunications regulation. Congress is considering legislation on the topic. The White House has been largely silent on the topic, letting FCC Chairman Powell take the lead. In this environment, it would be extremely unwise for the USTR to commit the United States or any other country to a particular regulatory approach. The problem of how to introduce competition to the telecommunications sector is not an easy one. Unbundling seemed like a viable solution—a way to introduce competition by sheltering competitors. But, as the D.C. Circuit has recently reminded the FCC, unbundling and its accompanying regime of price regulation has costs as well as benefits. And those costs have proven to be much larger than anticipated. The USTR should follow the FCC’s lead in telecommunications policy. And while the FCC reconsiders its past course, as the agency is now doing, USTR should leave the agency the freedom to do so. USTR should scrupulously avoid binding the United States to any particular regulatory approach in its treaty negotiations. The USTR tail should not wag the FCC dog.

Part III. Conclusion

Not every country needs to take the same path in liberalizing its telecommunications sector. New Zealand moved speedily towards deregulation by eliminating its main regulatory agency and letting the courts step in with antitrust principles. South American countries, such as Guatemala, have considered innovating approaches to resolving interconnection disputes using fast-track arbitration, also leaving regulators out of the mix. By contrast, the United States chose to depend heavily on regulation, but other countries need not do the same to meaningfully deregulate their telecom sector. The United States, back in the 1980s, chose to proceed by separating the local and the long distance phone markets, but most other countries wisely will not follow this path, either.

This debate is a difficult one. The USTR should not commit the Federal Communications Commission or other countries to any precise regulatory recipe, particularly since the American experiment with UNE’s and TELRIC has proved such a massive failure.

[4]Comments of FCC Commissioner Kathleen Abernathy, quoted in “Abernathy Describes ‘Limited’ FCC Role in Wake of Worldcom Woes,” Washington Telecom Newswire, July 9, 2002 (“’The previous Commission seemed intent on stimulating competition as quickly as possible without regard to the kind of competition that was being promoted and whether or not it would be long-lasting and beneficial,’ Abernathy said.’It was sort of like overall numbers were more important than long-term sustainability.’ As an example, she said CLECs were given access to ‘just about every conceivable element’ of an incumbent's network at TELRIC prices. This ‘overstimulated’ the entry of CLECs who rushed into the market to take advantage of these rates, Abernathy said. When capital markets shrank for the telecom sector, sustaining this many competitors became a problem, she said. ‘Telecom by its very nature is very capital intensive,’ she said. ’Long-term investment, long-term business strategies take a long time to become profitable. Those prior lessons were sort of ignored.’”)